Economics
and Evolutionary Psychology*

by David Friedman

Economics is built on a simple assumption—that individual behavior
can best be predicted by assuming that each individual will take the actions
that best achieve his objectives. The justification for that assumption,
somewhat misleadingly labeled “rationality,” is that we have no good
theory of mistakes, no way of predicting what particular irrational action an
individual will take. That leaves the rational element as the
best—although imperfect—way of predicting
behavior.[1]Evolutionary psychology offers, among other things, a theory of
mistakes—an alternative to the rationality assumption. In this essay I
sketch out the nature of that theory, describe some puzzles that economics has a
difficult time explaining, and try to show how modifying economics with the aid
of evolutionary psychology might help explain them.

Evolutionary Psychology: The Short
Version

The human mind is best understood not as
a general purpose computer but as a set of specialized software modules, each
designed to deal with a particular subset of problems.

Those
programs have been designed by Darwinian evolution to produce reproductive
success in our environment of evolutionary adaptiveness—the
hunter-gatherer environment in which our species spent most of its species
history.

Researchers in evolutionary psychology, starting with these
assumptions, have generated and tested predictions ranging from differences in
male and female special abilities to the timing of morning sickness.Three
important points are worth making about the second assumption in order to avoid
misunderstanding. The first is that the assumption is not that individuals seek
reproductive success—if we were doing that, the population of developed
countries would be increasing much faster than it is—but only that we have
those psychological characteristics that produced reproductive success in the
environment we evolved in. The second is that reproductive success is an
objective for the individual, not the group or species. Most scholars in
evolutionary biology accept the view that traits which benefit group or species
at the cost of the individual who carries them will be selected
out.[3]The third point is that we
are adapted not to the world we now live in but to the environment in which our
species spent most of its history. Agriculture is a recent development. We would
expect most of our characteristics to be designed to produce reproductive
success in the environment in which our species spent most of its evolutionary
history—believed to be an environment of small hunter-gatherer
bands.[4]

What Evolutionary Psychology
Adds

Evolutionary psychology adds two modifications to the rationality
assumption. The first is an increase in its precision. Economists assume that
individuals have objectives. But economic theory does not tell us what those
objectives are, although observation and introspection provide at least a rough
idea of what they are likely to be. Evolutionary biologists, on the other hand,
know the objective of
genes[5]—reproductive success
or, more precisely, inclusive fitness, getting as many copies of themselves as
possible into future
generations.[6]It follows that the
assumptions of evolutionary psychology give economists some ability to predict
what utility functions individuals will have. That ability is limited by our
ignorance of the opportunity sets facing the genes—what sorts of organisms
it is possible for them to construct. If, for example, there were a way of
constructing a (phyloprogenitive) superman, a human being much stronger, faster,
healthier, smarter, than existing humans and capable of surviving on practically
anything, the gene that pulled off the trick would be a big winner in the
Darwinian race. The absence of such supermen suggests that it cannot be done, or
at least that doing it is so difficult that no gene has yet had managed it.A
less obvious example of the same point is the observed limit to how
phyloprogenitive real human beings are. We are designed to seek reproductive
success through a variety of traits—desire for sex that leads us to
reproduce, parental love that leads us to care for our offspring, and many
others. But despite those traits human beings, in the environments of recent
centuries, produce far fewer children than they could produce and successfully
rear—in part because we have found ways, ranging from birth control to
pets, to sabotage the objectives of our genes in order to better serve our own
objectives.[7] A true phyloprogenitive
gene, one that made reproductive success a high priority of every individual,
would confer an enormous reproductive advantage on its carriers and rapidly
spread through the population.[8] The
absence of such a gene is presumably due to the difficulty of such precise
programming of an organism as complicated as a human being, plus the short time
that has passed since the developments that make that tactic for reproductive
success so much superior to less direct approaches.Knowing the objective of
our genes is not sufficient to tell us, with confidence, the objectives of the
human beings that those genes build. But it is enough to suggest
hypotheses—characteristics that would lead to increased reproductive
success and that it might be possible for genes to give to the organisms they
construct. Having formed such hypotheses, we can then test them by comparing
their predictions to what we observe. That is a methodology routinely used in
evolutionary biology—including, but not limited to, evolutionary
psychology. It is the same as the methodology of positive economics save for a
different and more explicit procedure for forming hypotheses.One way in
which evolutionary psychology modifies the rationality assumption is by
predicting what objectives individuals are likely to have. A second is by
providing a theory of mistakes.Compared to rational thinking, Darwinian
evolution is a slow process. While we expect economic man to choose the actions
that achieve his objectives in the environment he observes around him, we expect
evolutionary biological man to be designed to achieve his objectives—more
precisely, his genes’ objectives—in the environment in which his
species evolved. It follows that individuals are likely to be
irrational—designed to act in ways not well designed to achieve their
objectives—when the relevant features of the environment have changed
rapidly enough so that evolution has not yet had time to catch up. The theory
predicts not merely that individuals will make mistakes—that we already
knew—but what mistakes they will make. They will make those mistakes that
would have led to reproductive success in the environment in which the
psychological characteristics leading to those mistakes
evolved.[9]

Economic
Puzzles

Economists sometimes observe people acting in ways that appear difficult or
impossible to make consistent with the economic approach to understanding
behavior. In this section I first consider a group of such economic puzzles that
I believe can all be explained by a common characteristic of human
psychology—the belief in just prices—itself explainable on
evolutionary grounds. I then go on to consider two more
puzzles—inconsistent time preferences and endowment effects—each of
which I argue has an evolutionary explanation.

Behavioral Consequences of the Belief in Just
Prices

The first puzzle is the existence of predictable lines. Consider a
restaurant whose patrons know that if they come for dinner on Friday or Saturday
they will have to wait forty-five minutes for a table. The line does not
increase the number of people the restaurant can
serve[10] but does impose an
additional cost on customers in waiting time, raising the total cost of the meal
enough to reduce quantity of meals demanded to the quantity the restaurant is
capable of producing.Suppose the wait is the equivalent, from the standpoint
of the customers,[11] to a
ten-dollar increase in price. If the restaurant simply raised its price for the
nights it was busy by ten dollars the line would shrink to close to zero.
Customers would be no worse off—they would be paying the extra price in
money instead of time—and the restaurant would be better off by ten
dollars per diner. In the longer run, the increase in the amount restaurants
could charge on busy nights would increase the supply of restaurants, bringing
down the price and transferring at least some of the benefit back to the
customers.Restaurants do, to some extent, vary their price in this
way—usually by announcing special discounts for low-demand nights rather
than special surcharges for high-demand
nights.[12] Nonetheless, predictable
long lines are a familiar feature of the restaurant world, which suggests some
significant constraint limiting the degree to which they can vary their prices.
A similar pattern is observed in other contexts—concerts, opening nights
of popular films, and the like. Producers frequently follow pricing polices that
lead to wasteful competition for under-priced goods. Doing so appears to make
the producer worse off, contrary to what we would expect from the assumption of
rationality.One response consistent with casual observation is that a rock
group or movie theater that routinely charged a price sufficient to ration
demand down to supply for high-demand events would offend its customers and thus
lose more in the long run than it gained in the short. But this explanation
raises a second puzzle—the behavior of the customers. The average customer
is no worse off in the short run as a result of such a policy, since it merely
converts cost in time into cost in cash. And he is better off in the long run.
So why should customers be offended? Why should they choose not to patronize
producers who price their goods in the way that economic theory suggests they
should?[13]A second and less
striking puzzle is why firms that sell the same product at different prices at
different times almost invariably describe their policy as a normal price and a
discount rather than a normal price and a surcharge. This is less puzzling than
the existence of predictable lines because there is no strong argument against
doing it that way. But there is no strong argument for, either. Given that we
already know what firms do, it is easy to argue that doing it that way makes
them look good—they are giving their customers a special deal. But one
could just as easily argue that the alternative policy makes them look good
because it implies a lower ordinary price.Next consider the history of price
control. A law fixing a legal price below the price that would emerge from the
market has a variety of consequences. In the long run, it is likely to make
almost everyone worse off.[14] In
the short run, however, it may well benefit purchasers at the expense of
producers—and for some products, most notably rental housing, the short
run may be long enough to produce substantial transfers. Voters are, for
familiar reasons, rationally ignorant, and long-run costs are often less obvious
than short-run benefits. So it is not astonishing that imposing price control is
sometimes politically profitable.What is surprising is the pattern of when
it is politically profitable. The costs and benefits of holding a price ten
percent below its market level do not depend on whether the restriction prevents
a price rise or forces a price
reduction.[15] Yet the former case
is very much more common than the latter. Price control almost always arises in
a context where it is intended to prevent prices from rising, very rarely in a
context where a price is stable and the control is designed to push it below its
current level.All of these puzzles can be explained by a single assumption:
Individuals believe that the proper price for a good is the price at which they
are used to buying the good, resent being charged more than that price, and
therefore attempt to punish those charging the higher price. That assumption is
consistent both with casual observation of reactions to sharp price increases
and with the history of ideas such as the scholastic philosophers’
doctrine of the just
price.[16]Seen from the
standpoint of economic rationality, the assumption makes little sense. Most
people have no clear idea what determines the prices of the goods they buy, so
no way of knowing whether yesterday’s price was fair, or just, or cost
justified, or whether today’s higher price fails any of those
criteria.[17]The behavior
associated with the belief—the attempt to punish those charging "unjust"
prices–also makes little sense. Suppose I really do know that a particular
price is in some meaningful sense too high—say higher than the
economically efficient price. Why is that a reason for me not to buy the good,
assuming it is still worth more to me than it costs? Why is it a reason for me
to be angry at the seller and express that anger by avoiding future transactions
with him even if they would benefit me? In a world where goods and services are
sold to large numbers of anonymous customers I cannot reasonably expect my
refusal to buy, however justified, to induce the seller to lower his
price.

Evolutionary Psychology and the Just Price

Now shift the analysis back twenty thousand years. As a member of a
hunter-gatherer band, you engage in a variety of transactions with your fellows,
trading goods and services—food, sex, support in intra-group conflict, and
the like. While money has not yet been invented, prices—the amount of food
you must give in exchange for sex, the favors you must do someone if you want
him to do a favor for you—are a familiar part of your environment. In this
world all markets are thin—it is, after all, a small band—so the
typical transaction is a bilaterial monopoly bargain.Assume an environment
sufficiently stable so that, for some transactions, there are “usual
prices.” Those prices must be within the bargaining ranges of both buyer
and seller,[18] since otherwise the
transactions would not occur. The environment is not, however, perfectly stable.
Sometimes the circumstances of one party or another shift his bargaining
range—the range of terms for which the transaction is in his
interest.You are a buyer whose current circumstances make the good much more
valuable to you than usual, widening the bargaining range. If you could somehow
commit yourself not to pay more than the usual price, you, rather than the
seller, would get the increased benefit from this transaction. One way to do so
is to be emotionally programmed to resent any increase above the usual
price—resent it enough so that the humiliation of being
“cheated” will outweigh the gain from the transaction.As in any
bilateral monopoly game, the argument works both ways. If the seller could
somehow commit himself not to accept less than your reservation
price,[19] he would be the one to
pocket the gains from the trade. There is, however, an important difference
between your situations. You know the usual price and, assuming the special
circumstances affect only you, know that it is probably within the
seller’s bargaining range. So your commitment strategy is unlikely to
commit you to a price outside the bargaining range—which would make the
transaction impossible. The seller does not know your reservation price, so if
he commits himself to his guess at what you are willing to pay he may choose a
price at which the transaction can not occur.A second difference is that the
usual price is common knowledge of both parties. If the seller believes that the
buyer is committed not to pay more than the usual price, he knows how much he
can ask. But if the buyer believes that the seller is committed not to accept
less than the buyer’s reservation price, he still has to guess what the
seller believes that is.The strategy works symmetrically when the seller is,
for special reasons, willing to accept a much lower price than usual—on a
barter market, this is the same situation seen from the other side. And,
returning briefly to the present, we observe that people resent not only
unusually high prices when they are buyers but unusually low prices when they
are sellers—giving us, among other things, one explanation for why wages
are sticky downwards.What about the situation where the seller’s costs
are unusually high, making him unwilling to sell at the usual price? If the
result is to eliminate the bargaining range, no transaction will or should take
place. But if the seller’s cost is lower than the value to the buyer,
either because the special circumstances affect both in similar ways or because
the increased cost is still within the usual bargaining range, a buyer’s
commitment not to pay more than the usual price results in an inefficient
bargaining breakdown.There is a solution to this problem. A seller charging
an unusually high price can defend himself against the buyer’s commitment
strategy by offering to show the buyer that his costs really are unusually high,
that he is really, and not only strategically, unwilling to sell at the usual
price. From that we get the conventional view of pricing that economists find so
frustrating and wrongheaded—as the outcome of bargaining between buyer and
seller, with each required to justify any deviation from past prices.It
follows that, in the context of a hunter-gatherer society (more generally, a
society where most transactions take place on thin markets) belief in a just
price—defined as the usual price—can be understood as a commitment
strategy that benefits those who adopt it. The benefit depends on an environment
sufficiently stable so that knowledge of past prices provides a simple rule for
identifying a price that is probably within the other party’s bargaining
range. It works better if bargainers can to some degree identify situations
where the rule would result in one party demanding a price outside of the
bargaining range and treat them as special cases..We now have a possible
solution to the set of puzzles described above. Human beings have a functional
module in their minds that deals with exchanges with other human beings. One
feature of that module, hard-wired in by evolution, is that human beings regard
the usual terms of exchange as right and any deviation from those terms that
makes them worse off as a presumptively wicked act by the other party. This
feature resulted in human beings that possessed it getting better terms in
bilateral monopoly bargains in the environment in which we evolved, so having
more resources and achieving greater reproductive success.The belief in just
prices and the associated commitment strategy continue to benefit those who hold
it under some circumstances—markets with the features I have described.
They injure those who hold it in the anonymous mass-market settings in which
most modern economic transactions occur. And the fact that other people have
that characteristic makes me worse off, both because it leads to inefficient
policies by firms (long lines) and governments (price control) and because it
leads to those others getting better terms from me when we happen to be in a
bilateral monopoly transaction.

Primitives, Prices and Exchange

I began the previous section with the claim that hunter gatherers are
familiar with prices and exchange. The obvious context is individual
trade—usually and somewhat confusing described in the evolutionary
literature as reciprocal
altruism.[20] Thus, for example, we
observe a pattern among both humans and baboons where one individual assists
another in intragroup conflict in exchange for later assistance in the other
direction.[21] The existence of such
exchanges implies an implicit price—how much assistance must be given in
exchange in order that one party not regard the other as cheating on the
relevant social rule. Similarly, the exchange of food for sexual favors has been
observed among both humans and closely related
primates.[22]For a less obvious
form of exchange, consider meat sharing among the Ache of eastern Paraguay, who
were until very recently full time nomadic hunter-gatherers and still engage in
extended foraging trips. Hunting is done by the men. The individual hunter who
kills a particular animal has no ownership rights over it; the cooked animal is
shared out among the group. On the face of it, this looks like a situation of
pure communism—individual production, communal consumption, no
exchange.Anthropologists Kim Hill and Hillard Kaplan, in their study of the
Ache,[23] discovered an interesting
pattern: Individuals were identified as good or bad hunters and good hunters had
substantially greater reproductive success, more surviving offspring, than bad
hunters. Their explanation was that, despite the apparent egalitarianism of the
sharing of meat—which provided the bulk of the calories
consumed—good hunters were still rewarded. Membership in foraging bands
was fluid. In order to make sure that the good hunters went with a particular
band it was necessary for other band members to offer them rewards for doing
so—in the form of better care for their children, more sexual access to
women in the band, and the like. While the individual foraging band lacks
the formal hierarchical structure of a modern corporation, the situation is in
other respects one familiar to us. Most employees in a modern society, like
hunters in an Ache foraging band, have no ownership claim over the particular
goods or services they produce. Their reward still depends on their
productivity, but through a more indirect mechanism. Firms that pay employees
less than they are worth risk losing them to other firms. Foraging bands that
under reward good hunters may find that, next time around, the good hunters go
with other bands. Just as in the case of individual exchange, there is an
implicit price, just one linked to the services provided rather than directly to
the goods produced.To see how the logic of just prices might play itself out
in this situation, consider the formation of a foraging band at a time when it
happens that no other bands are being formed. Members of the band could propose
to good hunters they wished to recruit that they be satisfied with the same
treatment as everyone else—that being preferable to staying home. Good
hunters committed to a norm of "just payment" would decline that
proposal—and if they were known to be committed to that norm would end up
with their usual favorable treatment.

A Bird in the Hand:
Evolutionary Psychology and Preferences Over
Time

Intertemporal choice provides a second example of puzzling behavior that
may perhaps be explained by evolutionary psychology. The usual economic model,
going back at least to Marshall[24]
and given its present form by
Samuelson,[25] assumes that an
individual’s preference between present and future utility can be
described by a discount rate. The preferred alternative is the one that
maximizes the present value of utility, discounted at that rate.
Mathematically:

U = U1 + U2/(1 + r) +
U3/(1 + r)2 + · · ·

Where
r is the individual discount rate on utility, U is the utility that the
individual maximizes, U1 is the utility received in year 1,
U2 in year 2, and so forth.While it is not clear that this
particular structure is required by rationality, it does have some attractive
properties. In particular, it guarantees that the preference between two future
alternatives at different dates does not change as we approach them; individual
choice is, in that sense, consistent over time.While this seems a plausible
description of rational choice, it does not appear to describe real world
behavior.[26] A variety of
experiments show that many individuals, faced with (say) the choice between a
thousand dollars today or eleven hundred dollars next week will prefer the
former, yet faced with the choice between a thousand dollars a year from now and
eleven hundred dollars a year plus a week from now will prefer the latter. The
usual pattern appears to be a very high discount rate for choices in the near
future and an increasingly low discount rate as the alternatives become more
distant.[27]Evolutionary
psychology suggests a straightforward explanation for such a pattern. In the
experimental setting, subjects are told that they are choosing between two
certain payoffs at different times. In the world in which we now live, that is a
believable story; modern financial institutions make possible secure promises of
future performance, such as those embodied in certificates of deposit or U.S.
government bonds.The world in which our species evolved did not have such
institutions. In that world it was rational to discount promises of future
performance. One meal today was worth a great deal more than one meal next week
because today’s meal was there to be taken; next week’s might not
be. One meal a year from now, on the other hand, was not worth much more than
one meal a year plus a week from now; both were promises that might well fall
through, and the chance of their falling through was not greatly altered by the
additional week.[28]Not only was
the behavior rational twenty thousand years ago, it was, to a considerable
degree, rational a good deal more recently, sufficiently so to become
proverbial. “A bird in the hand is worth two in the
bush.”[29]

Endowment Effects

A professor purchases lots of school mugs, selects at random half the
members of a group of students, and gives one to each of them. He then asks each
student with a mug to state the price at which he would be willing to sell it
and each student without a mug to state the price he would be willing to pay for
one. Finally, he calculates the market clearing price—the price at which
there is exactly one seller for each buyer—and reallocates mugs and money
accordingly.At the end of this process, the mugs should be in the possession
of whichever students most value them. Since they were originally handed out at
random, we would expect that about half of the students who most valued them
would have gotten them and half would not, hence that about half of the mugs
should change hands.In fact, almost none of them did. The conclusion from
this classic experiment[30] was
that, on average, people value a mug more when they have it than when they do
not—the lowest price at which someone who has a mug will sell it is, on
average, higher than the highest price that someone who does not have a mug will
be willing to pay to buy it. That was supported by the actual prices the
students gave. The median seller required about twice as much to be willing to
sell as the median buyer was willing to offer.This result—applied to
mugs and much else—is known as an endowment effect. On average, for many
but not all sorts of things, someone who owns something values it more than
someone who does not. While the results of a single experiment along these lines
can usually be explained away as due to something else, the experiment has been
repeated enough times in enough different ways to justify considerable
confidence in the conclusion. One thus has the apparently paradoxical result
that someone choosing between one package containing a mug and ten dollars and
another containing no mug but fourteen dollars reveals inconsistent
preferences—whichever package he starts with, he prefers it to the
alternative.The explanation of this pattern of behavior starts with the
observation that it is not limited to humans.

Territorial Behavior

It has long been known that some species of animals exhibit territorial
behavior. An individual fish, bird, or mammal in some way claims a particular
territory for his own and attacks other members of his species that trespass on
it. Even if the trespasser is somewhat larger and stronger than the claimant,
the claimant usually wins such conflicts—at some point the trespasser
retreats.[31]The logic of the
situation is straightforward. Unless the trespasser is much stronger a fight to
the death is a losing game for both parties, since even the winner risks
substantial injury. The claimant has somehow committed himself to fight more
fiercely the closer the trespasser gets to the center of the territory. The
trespasser, recognizing that commitment, eventually backs down and retreats.
Presumably the commitment is accomplished through a behavior pattern hard-wired
into the psychology of a territorial species.A different way of putting this
is that territorial animals exhibit an endowment effect—each individual
will fight much harder to keep his territory than he will to conquer someone
else’s territory. The effect is not limited to real estate. It is a
familiar observation that a dog will fight harder to keep his own bone than to
take another dog’s bone.Now consider the same logic in a
hunter-gatherer society with no external institutions to enforce property
rights. Imagine that each individual considers every object in sight, decides
how much each is worth to him, and then tries to appropriate it, with the
outcome of the resulting Hobbesian struggle determined by some combination of
how much each wants things and how strong each individual is. It does not look
like a formula for a successful society, even on the scale of a hunter-gatherer
band.There is an alternative solution, assuming that humans are at least as
smart as dogs, robins, and Siamese fighting fish. Some method, possibly as
simple as physical possession, is used to define what belongs to whom. Each
individual commits himself to fight very hard to protect his property—much
harder than he would be willing to fight in order to appropriate a similar
object from someone else’s possession—with the commitment made by
some psychological mechanism hard-wired into humans. The result is both a lower
level of (risky) violence and a more prosperous society.The fact that the
result is attractive does not guarantee that it will occur—evolution
selects for the (reproductive) interest of the individual, not the group. But in
this case they are the same. To see that, imagine a population in which some
individuals have adopted the commitment strategy described above, some have
adopted no commitment strategy, and some have adopted different commitment
strategies—for example, a strategy of fighting to the death for whatever
they see as valuable. It should be fairly easy to see that individuals in the
first group will, on average, do better for themselves—hence have (among
other things) greater reproductive success—than those in the second and
third.How do I commit myself to fight very hard for something? One way is by
perceiving it as very valuable. So the same behavior pattern that shows up as
territorial behavior in fish and ferocious defense of bones in dogs shows up in
Cornell students as an endowment effect. Just as in the earlier cases, behavior
that was functional in the environment in which we evolved continues to be
observed, even in a context where it now serves no useful
purpose.[32]

Filling in the Utility
Function

So far I have been discussing the use of evolutionary psychology to solve
puzzles—explain situations where the conclusions of economic analysis
appear inconsistent with observed behavior. Evolutionary psychology can also be
used to make sense of behavior which, while not inconsistent with conventional
economics, is also not implied by it—to explain why the individual utility
function has charcteristics needed to explain observed behavior.One obvious
example is parental altruism towards children. In some environments it makes
sense as a means to narrowly self-interested ends—productive children are
better able to take care of their parents in their old age in a society where
that is the chief form of old age insurance. But the behavior appears more
general than that—as we would expect if our utility functions were shaped
by evolution to maximize reproductive success. Children who die young do not
produce grandchildren; children who grow up to be able and productive
individuals, at least in most past societies, can and do produce and rear more
grandchildren as a result.A less obvious example is concern with status. As
Robert Frank has convincingly
argued,[33] humans appear to care
about both real income and relative income. While a concern with relative income
is not inconsistent with economic rationality, neither is it implied by it. My
ability to get most of what I want depends on how much my income can buy, not on
how much yours can.In a hunter gatherer band, however, there is one resource
which is in fixed supply and of enormous importance for male reproductive
success—women. How many children I can feed depends on my real income. But
my ability to persuade one or more women to produce children with me depends on
my resources—material and otherwise—relative to those of the other
men against whom I am competing. Similarly, the ability of a woman to persuade a
man to produce children with her and help support them depends in part on her
status vis a vis the other women on whose children that man might spend his
limited resources. So we would expect both relative status and real income to
play important roles in the individual utility function produced by evolutionary
selection.This explanation has an interesting implication. If it is correct,
men ought to be primarily concerned with their status relative to other men,
women with their status relative to other women. I do not know whether or not
that prediction is empirically confirmed.

Conclusion

I have offered three examples of patterns of behavior apparently
inconsistent with the usual account of economic rationality and shown how each
may be explained, perhaps even predicted, by evolutionary psychology. Behavior
associated with deeply held beliefs about just prices makes sense as a
hard-wired commitment strategy designed to give its holder an advantage in the
bilateral monopoly bargains that must have been common in the hunter-gatherer
societies in which our species evolved. A pattern of apparently inconsistent
choices over time makes sense as reflecting the lack of reliable mechanisms for
guaranteeing the performance of future obligations in that same society.
Endowment effects are the predictable result of commitment strategies that make
possible a system of property in a world without public law enforcement.In
all three cases, evolutionary psychology plays the second of the two roles that
I described at the beginning of this article—it functions as a theory of
mistakes. That is not surprising. Insofar as evolutionary psychology tells us
what our utility function is, it improves upon the economic model of rationality
but does not contradict it. It is only when it tells us what actions we will
take that do not serve our interests that it contradicts the conventional
approach and so makes it possible to find evidence for one and against the
other.

*
An earlier version of this article was published, in English,
Catalan, and Castilian in the 4/2001 issue of the webbed journal Indret. It is a
first pass at a large problem. I hope others will find it sufficiently
interesting to want to both extend the analysis to other economic puzzles and
sharpen the tests it generates so as to provide something more like evidence and
less like anecdote to help us choose between the alternative approaches to human
behavior offered by economics and evolutionary psychology.

[1] The argument is summarized in
D. Friedman, Hidden Order: The Economics of Everyday Life, HarperCollins:
New York 1996, pp. 3–9. A webbed version can be found in D.
Friedman, Price Theory,

[2] For a description and defense
of evolutionary psychology, along with a number of interesting applications, see
The Adapted Mind by Toobey, Cosmides, and Barkow. For a discussionof its
relevance to social sciences in general, including economics, see Zywicki
(2000).

[3] It is logically possible for
traits that benefit a group at the expense of the group members who carry them
to produce an increase in success for the group large enough to make up for the
decreased success of the member relative to other members of the group, but that
is usually viewed as an unusual special case.

[4] Owen Jones uses the term
"time shifted rationality" to express this idea.

[5] “Objective of
genes” is, of course, a metaphor. Genes do not have minds, hence do not
have objectives. But the organisms we observe are constructed by those genes
that succeeded, in past generations, in constructing organisms that got those
genes passed down. Hence genes are shaped, as by an invisible hand, to construct
organisms whose characteristics result in reproductive success for the genes
that constructed them.

[6] "Inclusive fitness" includes
both increasing the frequency of your genes through your own reproduction and
increasing their frequency by aiding the survival and reproduction of kin, who
share some of your genes.

[7] A point dramatically made by
Richard Dawkins in The Selfish Gene; he describes human beings as the
real world equivalent of science fiction robots who have revolted against their
makers. The clearest evidence that couples in modern societies could produce and
successfully rear substantially more than two children is that many do so,
despite having no more resources available to them than the much larger number
who do not.

[8] Reproductive success includes
both producing offspring and successfully rearing them—successfully enough
to give them, in turn, the opportunity for successful reproduction. While it is
an important way of increasing the frequency of your genes in future generations
it is not the only way, so would not be the sole objective of an organism
perfectly designed for that purpose. My full siblings are as closely related to
me as my children, so keeping a brother or sister alive and able to reproduce is
another way of increasing the frequency of my genes in future population, hence
of achieving inclusive fitness.

In developed societies most couples have about two children but could
produce and successfully rear eight—if doing so were their highest
priority—as demonstrated by some who do. A gene that resulted in its
carrier doing so would increase its frequency in the population a billion fold
in a mere fifteen generations.

[9] Readers interested in a much
longer and more detailed exposition of the basic ideas of this and the preceding
section of this essay—what evolutionary psychology is and what it implies
about rationality—will find it in Jones (2001), pp. 1161-1173. The later
parts of the article in part overlap with ideas of this chapter as well as
offering additional applications of the evolutionary approach, in particular
ones relevant to the design of legal institutions.

[10] A short line would
increase the number served, since it provides an inventory of customers that
allows the restaurant to produce at full capacity in the face of unpredictable
demand. My anlysis is of the effect of any additional wait beyond that necessary
to achieve that effect.

[11] Patrons are not identical,
but for my present purposes it is not necessary to discuss the differing effects
on patrons with differing value for time.

[13] There have been a variety
of attempts by economists to explain lines within a conventional economic
framework, none of which appears to me entirely satisfactory. See, for instance,
Becker (1991).

[14] For an analysis of reasons
this is true, see Price Theory Chapter 17 (webbed at
http://www.daviddfriedman.com/Academic/Price_Theory/PThy_Chapter_17/PThy_Chapter_17.html)
and Hidden Order Chapter 17.

[15] This is a slight
oversimplification; there are costs associated with the mechanics of pricing,
such as revising price tags and prices in advertisements, which are incurred if
price control forces prices down but avoided if it prevents prices from going
up.

[16] For a discussion of that
doctrine and the function it served, along lines related to the argument of this
essay, see D. Friedman “In Defense of Thomas Aquinas and the Just
Price.” For some evidence of similar attitudes in modern consumers, see
Richard H. Thaler, Mental Accounting and Consumer Choice, Marketing
Science, 1985. For a more extensive discussion of modern behavior patterns
inconsistent with the usual economic account of rationality, along with a good
deal of evidence, see Quasi-Rational Economics by Richard H.
Thaler.

[17] “For one thing, the
recent tripling of oil prices followed a sharp drop. In real terms, prices are
still one-third below their level in 1990, when Iraq invaded Kuwait, and half
their level in 1981.” The Economist, Sept. 9, 2000,
p. 17.

[18] Strictly speaking the
distinction is meaningless here, since we are talking about barter transactions,
but it is still useful for expository purposes.

[19] More realistically, to
insist on a price a little below your reservation price, so as to reduce risks
from error. Since the distinction is not important to my general argument I will
ignore it below in order to simplify the discussion.

[20] The original article is
Trivers (1971). The author speculates about rates of exchange among humans
engaged in reciprocal altruism (p. 46) but offers no evidence.

[21] Buss, pp. 259-264. Packer
(1977) describes the observed pattern of reciprocal support among olive baboons;
his data are not adequate to determine whether there is an implicit one for one
exchange. DeWall (1982) is primarily concerned with behavior (among chimpanzees)
more nearly analogous to human political behavior than to human market behavior.
Nonetheless, he describes behavior that appears to be "direct payment for
services rendered" (p. 203) and writes: "For the time being I should like to sum
up as follows: Chimpanzee group life is like a market in power, sex, affection,
support, intolerance and hostility. The two basic rules are 'one good turn
deserves another' and 'an eye for an eye, a tooth for a tooth.'" (p. 207)

[23] Kim Hill and Hillard
Kaplan,"Tradeoffs in male and female reproductive strategies among the Ache:
part 1" in Human Reproductive Behaviour: A Darwinian Perspective, Laura
Betzig, Monique Bogerhoff Mulder and Paul Turke eds., esp. pp. 283-4, where the
authors also discuss alternative explanations for their observations. Triver
(1977, p. 47) writes: "An individual in a subgroup who feels that another member
is subtly cheating on their relationship has the option of .... Attempting to
join another subgroup ... . ... There is evidence in hunter-gatherers that
much movement of individuals from one band to another occurs in response to such
social factors as have just been outlined."

[26] For an extensive
discussion of the experimental evidence and various attempts to interpret it,
see George Loewenstein and Jon Elster, Choice Over Time, Russel Sage
Foundation, N.Y. 1992.

[27] The observed pattern is
sometimes described as “hyperbolic discounting,” since it fits a
hyperbolic function better than it fits the exponential implied by the
conventional economic model of intertemporal choice.

[28] This would not be true if
we modeled contract non-fulfillment as the result of a stochastic process where
each week there was a certain probability that the other party would decide to
renege on his obligation. That would yield the same result—expected value
declining exponentially with time—as the conventional model. But there are
at least two more plausible models that work better:

Fulfillment depends on the relations between the two parties at the time
the obligation comes due. Relations each week have some probability of switching
from friendly to unfriendly, and also some probability of switching from
unfriendly back to friendly. They are friendly when the agreement is made. As
time goes on, the expected state of relations moves towards its equilibrium
level.

Fulfillment depends not on future events but on the present plans of the
other party. The longer it is until the obligation comes due, the easier it is
for him to get out of it—to be somewhere else, or to have acquired allies
to use against any retaliation by your for non-performance, or to claim to have
forgotten it (this is, after all, a world without writing). Hence the fact that
the offer is well into the future signals that he probably does not intend to
fulfill it.

[29] An explanation along
generally similar lines can be found in Jones (2001), pp. 1177-1179.

[31] For an early description
of such behavior, see Konrad Lorenz, On Aggression, Chapter 3 (pp.
23-48).

[32] A willingness to fight
unreasonably hard to defend what is yours is still sometimes useful even in a
society where the government plays a role in protecting property. For a general
discussion of commitment strategies as a foundation for social order in general
and property in particular, see David Friedman, “A Positive Account of
Property Rights,” Social Philosophy and Policy 11 No. 2 (Summer
1994) pp. 1-16.

Jones (2001) pp. 1183-1185 also links endowment effects to territorial
behavior, but offers a different explanation.

[33] Frank, Robert, Choosing
the Right Pond. The book is an extensive discussion of the economic
consequences of the fact that individuals value status. On page 19 the author
mentions competition for food, mates and other desiderata as one explanation of
that taste but does not point out the special significance of the fixed supply
of potential mates for the importance of relative rather than absolute
outcomes.